HELP:Calculating Interest

Tongue

Hi all

I would like someone to explain to me in lay-mans terms how to calculate monthly interest on say a deposit of £1000 with an interest rate of 4% if possible.

And also could anyone tell me the best place to invest cash with interest paid monthly, no withdrawl penalties and instant access.

Many thanks

grumbler

Tongue wrote:

Hi all

I would like someone to explain to me in lay-mans terms how to calculate monthly interest on say a deposit of £1000 with an interest rate of 4% if possible.

And also could anyone tell me the best place to invest cash with interest paid monthly, no withdrawl penalties and instant access.

Many thanks

If the year interest is less than 10% you can calculate approximate monthly interest just by dividing by 12: 4%/12=0.333%
The accurate way of calculation that always give correct result is:
(1+0.04)^(1/12)-1=0.00327=0.327%

P.S. For monthly interest go to ING. However, I do not see any advantages of monthlly interest as against yearly interest.
'Monthly or Annual Interest ???' thread.

Milarky

P.S. For monthly interest go to ING. However, I do not see any advantages of monthlly interest as against yearly interest.

There is one advantage I can see - assuming the 'AER' is the same on the account for comparison - which is that if a mistake is made in calculating the interest it can be picked up more easily - and sooner - and set straight.

Stonk

ING pays 5.00% monthly, but slightly better is Bradford & Bingley's eSaver which pays 5.25%, which you can opt to take it monthly. The monthly and annual rates are equivalent on this particular account, but take care with other providers because most will penalise you if both annual and monthly interest are available and you choose the latter.

The B&B account requires a minimum balance of £1K, and in other respects works through an associated current account just like ING. I have had no problems with either ING or B&B. Perhaps I shouldn't write things like that on Friday 13th.

I can't see any material benefit to having monthly interest, unless you're planning to live on it. Unless, like B&B, the rates is the same, in which case, why not? There's a psychological benefit: I must admit I log on to my monthly accounts on the first day of every month to check out the interest earned ;o)

Tony_H_3

Ask a silly question!!

If you invest 1000 and are paid annual interest of 4% then it would be 1000 + interest, surely if you opt for monthly interest it would be:

Month 1 = 1000 + Interest (4%/12) = New Balance

Month 2 = 1003.33 + Interest (4%/12) = New Balance

Month 3 = 1006.67 + Interest (4%/12) = New Bal......

You would effectively be being paid interest on interest?

So surely monthly interest would have to be better than annual interest, YES | NO

grumbler

Tony_H wrote:

Ask a silly question!!

If you invest 1000 and are paid annual interest of 4% then it would be 1000 + interest, surely if you opt for monthly interest it would be:

Month 1 = 1000 + Interest (4%/12) = New Balance

Month 2 = 1003.33 + Interest (4%/12) = New Balance

Month 3 = 1006.67 + Interest (4%/12) = New Bal......

You would effectively be being paid interest on interest?

So surely monthly interest would have to be better than annual interest, YES | NO

NO
Annual Equivalent Rate (AER) takes into account compounding interest i.e. interest on interest.
For example, for 4% AER monthly interest is 0.3274%:
1__1000.00_3.274
2__1003.27_3.284
3__1006.56_3.295
4__1009.85_3.306
5__1013.16_3.317
6__1016.48_3.328
7__1019.80_3.339
8__1023.14_3.350
9__1026.49_3.360
10_1029.85_3.371
11_1033.22_3.383
12_1036.61_3.394
___1040.00
The only difference is that for annual interest this calculation is done and interest (£40) is added once at the end of the year. For monthly interest this calculation is done 12 times and interest is added 12 times by smaller portions.

grumbler

Just some development of my posts above:

If you put £1000 into 4% AER account and want to have the same balance at the end the year you can withdraw £3.27 every month.
If interest is added monthly you will have the same balance £1000 every month after interest is added and withdrawn.
If interest is added annually you will have decreasing balance during the year as a result of withdrawings, but the same £1000 at the end of the year when interest is added.

Tongue

Thanks everyone for the various explanations, I'll go with MONTHLY interest so I can SEE my nest egg GROW.

Cheers

grumbler

Tongue wrote:

I'll go with MONTHLY interest so I can SEE my nest egg GROW

With 5.35% yearly interest you will SEE your nest egg GROW faster.... :rotfl:

yellow_banana

Hi all. I'm a first timer on this site so treat me with kid gloves!! My wife has opened a savings account with Alliance & Leicester (Premier Savings A/C I think) which pays 10% pa but she is paying in £250 per month. We have both tried calculating the compound interest on this type of account and our first results netted us (wishfully) a good couple of grand! We couldn't really believe this so tried a different method and then got completely lost. Duh.

An example on another thread quotes the interest on a fixed amount but how do I calculate the interest on this type of account and what is the likely amount at the end of the 12 months term of this account?

Signed... puzzled!

Colxfile

Welcome to the painfuly complex (Unless you know how ) world of annuities.

The future value of you nest egg after n years will be:

FV = X * ( [ [1 + i] ^ n] - 1) / i

Where:
n = number of years
i = annual interest rate, paid annually in arrears.
X = the annual amount invested.

Example: £3000 a year at 7% interest for 5 years:

FV = 3000 * ( [1.07 ^ 5] - 1) / 0.07
FV = 3000 * 5.7507...
FV ~ 17,252.22

The monthly version is slightly more complicated, will post in a moment.